Here's Your Shot to Score Big

Which great philosopher held the secret to improving your returns?

Whenever I need investing inspiration, I turn to "The Great One" -- but I don't mean Peter Lynch, Benjamin Graham, or even Warren Buffett -- though Buffett is apparently a fan of the Great One too (I'll explain in just a moment) ...

And I definitely don't mean Jim Cramer.

You've probably heard The Great One's name dozens of times, but you may not know just how wise he is. Nonetheless, he's said some very smart things. For instance ...

"You miss 100% of the shots you never take"That's but one of the many pearls of wisdom The Great One has dropped over the years. And while it might seem obvious, or even trite, it's a truth we often take for granted.

Just think of the person you never asked to the dance, or the job you never applied for, or the novel you never finished ... or the stock you never purchased.

It happens to all of us. We get nervous, or doubtful, or busy, or ... you name it. And that might end up costing us the person of our dreams, or the job we've always wanted, or our only shot at fame. But in the case of investing, it will definitely cost us a fortune.

Back in 2007, three stocks sat on my watch list for a full 365 days:

Stock

Gain in 2007

Market Cap Today (in billions)

Google

50%

$107

Apple

134%

$84

Chipotle

158%

$2.0

A $17,100 mistakeShould I have bought all three? Perhaps. But by not investing in any of them, I wound up making a grand total of ... nothing. Nada. Zip. Zilch.

However, had I decided to take a shot, I would have scored -- big time. Five grand invested in each company at the beginning of 2007 would have been worth $32,100 one year later.

Granted, all three of these stocks have been absolutely decimated in 2008 -- right along with virtually every other stock out there. Some of you will no doubt argue that these businesses were drastically overvalued in 2007, and that it's actually a blessing I didn't end up buying any of them.

But all three are expertly managed, cash-generating businesses that I fully believe will build shareholder value over the long term. Had I bought them in 2007, I would have had a shot to lock in some incredible gains -- and thanks to today's dismal market, investors like us now have a shot to build positions on the cheap.

And if we want to score really, really big ...We have to follow The Great One's most famous piece of advice: "Skate to where the puck is going, not to where it's been."

You may already know that The Great One is ice hockey legend Wayne Gretzky. If not, all you need to know is that Gretzky was arguably the greatest player to ever take the ice.

What made him The Great One? Quite simply, he was always one step ahead of everyone else -- not because of his speed, but because of his anticipation. While everyone else skated to where the puck had just been, Gretzky always skated to where it was going next.

That's the key to great investing, tooAnd I'm apparently not the only one who thinks so. In a recent op-ed piece he penned for The New York Times, Warren Buffett used this same quote to make the point that investors who keep their cash on the sidelines until market sentiment turns positive are missing out on a potentially huge opportunity.

While I couldn't agree more with Mr. Buffett, I think this quote has an even more meaningful connection to investing. If you look back at my watch list, you'll notice an interesting correlation between market cap and percentage gain: the smaller the business, the greater the returns. That won't always be the case, of course, but it's a quick and dirty way of showing that the best performers do indeed start small.

It's simple math, really. While Google is one of the world's most powerful and innovative companies, it would have to pack on another $107 billion for its shares to double again.

Meanwhile, if Chipotle gains even one-tenth that amount, its share price should soar more than 500%.

Bigger isn't better, but size does matterIf you want even more proof of this investment phenomenon, just take a look back at 2007's top-performing stocks.

Here are a few companies that began 2007 with market values greater than $5 billion:

Stock

Gain in 2007

Rank Among Large Caps

National Oilwell Varco(NYSE:NOV)

140%

No. 8

Suntech Power(NYSE:STP)

142%

No. 6

PotashCorp(NYSE:POT)

201%

No. 2

And here are a few companies that began 2007 with market values less than $5 billion (but more than $50 million):

Stock

Gain in 2007

Rank Among Small Caps

Foster Wheeler(NASDAQ:FWLT)

181%

No. 36

SunPower(NASDAQ:SPWR)

251%

No. 18

DryShips(NASDAQ:DRYS)

330%

No. 9

First Solar(NASDAQ:FSLR)

795%

No. 1

Data provided by Capital IQ, a division of Standard & Poor's.

While the gains of the top-performing large caps were certainly impressive, it's worth noting that the 18th best-performing small cap returned 50 percentage points more than the best-performing large cap. In fact, of the top 10 overall performers, none was a large cap.

Granted, many of these small caps have fallen victim to massive sell-offs in recent months -- but so have large caps.

For further proof, just have a look at the top 10 best-performing stocks of the past 52 weeks ...

Stock

Market Cap (in millions)

52-Week Gain

Emergent BioSolutions

$753

402%

Crawford & Company

$778

270%

Mexco Energy Corporation

$27

234%

American Italian Pasta Company

$513

228%

New Concept Energy

$8

151%

Kirkland's

$52

181%

Fuel Systems Solutions

$550

144%

American Caresource

$106

143%

TeleCommunications Systems

$384

142%

Emergent Holdings

$48

137%

Data provided by Google Finance.

So, here's how can you score big in 2009:First off, keep Buffett's advice in mind. Second, keep The Great One's advice in mind. Finally, take a page out of my colleague Tim Hanson's book, and make sure to look for stocks that are:

Obscure

Ignored

Small

These three traits have characterized some of the best-performing stocks of the past decade. More importantly, they will characterize some of the most lucrative stocks of the next 10 years.

In fact, we started our Motley Fool Hidden Gems service precisely to uncover businesses with these three traits -- companies poised to rank among the very best investments of the next decade and beyond.

In other words, the Hidden Gems team is dedicated to discovering where the puck is going next. And thanks to the current market sell-off, many of today's most promising small-cap stocks are selling at bargain-basement discounts. In other words, if ever there were a perfect time to take your shot and score big, this is it.

If you'd like to learn more, or you just need a little help uncovering great small-cap businesses, you can see all of our recommendations -- including our top two picks for new money -- with a free 30-day guest pass.

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This article was first published Jan. 25, 2008. It has been updated.

Austin Edwardsfinally did buy shares of Apple, Chipotle, and Google in 2008. Apple and National Oilwell Varco are Motley Fool Stock Advisor recommendations. Chipotle, Google, and Suntech Power are Rule Breakers picks. Chipotle B shares are Hidden Gems recommendations. The Fool owns Chipotle B shares. The Fool's disclosure policy is the coolest game on Earth.